Monday, April 09, 2007

Economic Inequality: Is it a Natural law ?

If your theory is found to be against the second law of theromodynamics, I give you no hope; there is nothing for it but to collapse in deepest humiliation.

It is one thing for the human mind to extract from the phenomena of nature the laws which it has itself put into them; it may be a far harder thing to extract laws over which it has no control.

Arthur Eddington.

Economists who yearn for the redistribution of wealth in an ideal society are up against history. According to a recent study, the uneven distribution of wealth in a society appears to be a universal law that holds true for economies in many different societies, from ancient Egypt to modern Japan and the U.S. This distribution may reflect a simple natural law analogous to a 100-year-old theory describing the distribution of energy in a gas.

In an interesting paper on applications of thermodynamic distribution Arnab Chatterjee et al Economic Inequality: Is it Natural ? have connected wealth distributions across different economies in a number of power law distributions based on power laws from the Gibbs theorem of free energy.

We are all aware of the hard fact: neither wealth nor income is ever uniform for us all. Justified or not, they are unevenly distributed; few are rich, many are poor! Such socioeconomic inequalities seem to be a persistent fact of life ever since civilization began. Can it be that it only reflects a simple natural law, understandable from the application of physics?

Investigations over more than a century and the recent availability of electronic databases of income and wealth distribution (ranging from national sample survey of household assets to the income tax return data available from governmental agencies) have revealed some remarkable features. Irrespective of many differences in culture, history, social structure, indicators of relative prosperity (such as gross domestic product or infant mortality) and, to some extent, the economic policies followed in different countries, the income distribution seems to follow a particular universal pattern, as does the wealth distribution: After an initial rise, the number density of people rapidly decays with their income, the bulk described by a Gibbs or log-normal distribution crossing over at the very high income range (for 5-10% of the richest members of the population) to a power law with an exponent (known as Pareto exponent) value between 1 and 3. This seems to be an universal feature: from ancient Egyptian society through nineteenth century Europe to modern Japan The same is true across the globe today: from the advanced capitalist economy of USA 4,5 to the developing economy of India .

The power-law tail, indicating a much higher frequency of occurrence of very rich individuals (or households) than would be expected by extrapolating the properties of the bulk of the distribution, was first observed by Vilfredo Pareto in the 1890s for income distribution of several societies at very different stages of economic development.Later, the wealth distribution was also seen to follow similar behavior. Subsequently, there have been several attempts starting around the 1950s, mostly by economists, to explain the genesis of the power law tail (for a review,see Champernowne). However, most of these models involved a large number of factors that made understanding the essential reason behind the occurrence of inequality difficult. Following this period of activity, a relative lull followed in the 70s and 80s when the field lay dormant, although accurate and extensive data were accumulated that would eventually make possible precise empirical determination of the distribution properties. This availability of large quantity of electronic data and their computational analysis has led to a recent resurgence of interest in the problem, specifically over the last one and half decade.


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